Question

Stone Co. begins operations in 20X9 and reports $225,000 in income before income tax for the year. Stone's 20X9 tax depreciation exceeds its book depreciation by $25,000. Stone also has non‐deductible book expenses of $10,000 related to permanent differences. Stone's tax rate for 20X9 is 40%, and the enacted rate for years after 20X9 is 35%. In its December 31, 20X9 balance sheet, what amount of deferred income tax liability should Stone report?

Answer 1

Answer:

The answer is: Stone can report $8,750 as deferred income tax liability

Explanation:

Deferred income tax liability: income tax owed by a business that is put off into future years because a difference exists between GAAP accounting (in this case book depreciation) and income tax accounting.

The deferred tax liability is based on the difference on depreciation. Since 20x9 is Stone Co.'s first year of operations, the depreciation difference in this year must equal the net future depreciation difference.

To calculate the deferred tax liability balance we take the difference in depreciation and multiply it by the future tax rate: $25,000 x 35% = $8,750.